Friday, August 3, 2012

In 2012, the Eurozone crisis has begun to follow a
predictable script. First, a member state begins to show signs of financial
stress, with a growing public deficit and debt burden alarming markets. The
spike in borrowing costs sparks a policy response by the member state
government, raising taxes and cutting public spending, which depresses economic
activity further. The resulting poor growth data leads to further increases in
borrowing costs. When these costs hit an unsustainable level, the European
Union institutions intervene by lending the struggling country bailout money,
in return for further commitments to reduce the deficit. A further fiscal squeeze follows, sending
the debtor nation into what economist Paul Krugman describes as a ‘death
spiral’.